Taxation Northern Ireland
Sample Paper 2 Questions & Suggested Solutions
INSTRUCTIONS TO CANDIDATES
PLEASE READ CAREFULLY
For candidates answering in accordance with the law and practice of the Northern
Ireland.
In this examination paper the £ symbol may be understood and used by candidates
in Northern Ireland to indicate the UK pound sterling.
Candidates should answer the paper in accordance with the appropriate provisions
up to and including the Finance Act 2016. The provisions of the Finance Act 2017
should be ignored.
Allowances and rates of taxation, to be used by candidates, are set out in a
separate booklet supplied with the examination paper.
Answer ALL THREE QUESTIONS in Section A, and ANY TWO of the THREE questions
in Section B. If any more than TWO questions are answered in Section B, then only
the first two questions, in the order filed, will be corrected.
Candidates should allocate their time carefully.
All workings should be shown.
All figures should be labeled as appropriate e.g. £s, units etc.
Answers should be illustrated with examples, where appropriate.
Question 1 begins on Page 2 overleaf.
The following inserts are enclosed with the paper:
Tax Reference Material
Section A
Answer ALL THREE questions
QUESTION 1
Regina has been trading for many years selling specialist photographic equipment
and prepares her accounts to 31st December each year. Regina owns the building
from which she trades and lives in the flat above the shop. The following is a
summary of her profit and loss account for the year ended 31 December 2016.
Notes
£ £
Gross profit 112,863
Other income:
Interest received 294
Discount received 172
Rents received (1) 1,837
2,303
115,166
Expenses:
Wages and salaries (2) 60,235
Repairs (3) 2,690
Interest on unpaid Income Tax 1,165
Bad debts (4) 1,595
Bank interest (5) 3,680
Postage and stationery 1,005
Employers & Public Liability
insurance
995
Light and heat (6) 1,855
Telephone (7) 2,223
Motor expenses (8) 2,768
Leasing charges (9) 3,224
Depreciation 3,035
Subscriptions (10) 1,121
Legal fees (11) 2,506
88,097
Net profit 27,069
QUESTION 1 (Cont’d)
Notes
(1) Rent received:
Some years ago Regina rented out office space that was surplus to her
requirements. This is the net rental income after all expenses associated with
the rental business have been deducted.
(2) Wages and Salaries:
£
Wages to staff 36,110
Drawings taken by
Regina
24,125
60,235
(3) Repairs:
£
Painting of shop and flat
interior
980
Purchase of fax machine 530
Repairs to office equipment 1,180
2,690
On floor area the flat represents 1/6th of the premises excluding the surplus
office space rented.
(4) Bad debts
£
Specific bad debts
written off
1,770
Loan to customer written
off
315
Bad debts recovered (490)
1,595
QUESTION 1 (Cont’d)
(5) Bank Interest
£
Interest on business
overdraft
470
Interest on mortgage for
business premises (excluding
rental area but including flat)
3,210
3,680
(6) Light and heat:
Regina estimates that 15% of these costs are related to private use
(7) Telephone:
£
Land Line 1,685
Mobile 538
2,223
After reviewing her phone bills Regina has calculated that 90% of the landline
calls and 35% of her mobile calls are for business purposes.
(8) Motor Expenses
£
Maintenance and repairs 568
Insurance 572
Petrol 1,488
Parking fines 140
2,768
These expenses refer to the motor car used by Regina. It has been agreed
with HMRC that business use of the car is 30%
QUESTION 1 (Cont’d)
(9) Leasing Charges
£
Leasing of office
equipment
1,116
Leasing Regina’s car 2,108
3,224
Assume that relevant CO2 emissions are 175 gms/km and that the lease period
commenced in 2012.
(10) Subscriptions
£
Donation to national charity 291
Subscription to trade magazines 685
Donation to political party 145
1,121
(11) Legal Fees
£
Collection of trade debts 482
Unfair dismissal claim by former
employee
795
Purchase of second investment
property by Regina
1,229
2,506
Requirement
Compute Regina’s tax adjusted profit for the year ended 31st December 2016.
Total 20 Marks
QUESTION 2
(i) Henry is 46 years old, married and a higher rate tax payer. For 2016/17
he has taxable benefits (relating to a company vehicle) in the amount of
£2,300 and underpaid tax from 2015/16 of £750. Henry’s subscription to
his professional body is £300 per annum.
Required
Calculate Henry’s tax code for 2016/17.
(4 Marks)
(ii) Frank used an employer provided company van (Co2 emissions 213
grams/km, list price £18,000, weight less than 3,500kg) in order to
carry out his maintenance duties at various sites. Frank is permitted to
take this van home in the evenings and at weekends and does use it for
private purposes. Frank’s employer undertook all diesel expenses for the
vehicle.
Required
Calculate Frank’s total benefit-in-kind with respect to his use of this
vehicle.
(3 Marks)
(iii) There are four conditions to be met in order for an expense to be
deductible against an employee’s salary.
Required
List the four conditions and briefly explain what they mean in practice.
(4 Marks)
(iv) Grantham commenced to trade on September 1st 2014, producing
accounts to 30th April 2015 (profit £13,200) and 30th April 2016 (profit
£22,740).
Required
Calculate Grantham’s assessable profits for the first three years of
assessment of his business and indicate if there are any overlap profits.
You may perform pro-rata calculations by reference to months rather
than days. Show your workings clearly.
(5 Marks)
(v) Sean commences to trade on December 1st 2015 selling luxury fine
furnishings. His monthly turnover for the first 14 months of trading is as
follows:
Month Turnover (£) Month Turnover (£)
December 2015 13,980 July 9,369
January 2016 13,870 August 9,562
February 12,687 September 10,956
March 12,765 October 11,654
April 14,489 November 13,952
May 13,975 December 16,953
June 11,962 January 2017 18,258
QUESTION 2 (Cont’d)
Required
Clearly identify by when Sean is obliged to register for VAT.
(4 Marks)
Total 20 Marks
QUESTION 3
Rory Parks has run a successful building supply yard for many years. You are
preparing the VAT return for the quarter ended 30th June 2016 and have extracted
the following information from his records.
£
Sales (exclusive of VAT, where applicable):
Standard-rated 149,700
Purchases: (exclusive of VAT)
Goods for resale (all standard-rated) 76,550
Expenses (inclusive of VAT, where applicable):
Wages of staff 31,255
Electricity 3,874
Accountancy fees 1,645
Buildings insurance 1,280
Legal fees 2,174
Other 15,164
Analysis of the available invoices (inclusive of VAT, unless otherwise stated) reveals
the following:
(i) Restaurant bills amounting to £485 have been included in ‘other’
expenses. The meals were enjoyed exclusively by Rory’s existing
customers.
(ii) Postal services of £448 were also paid during the quarter and have been
included in ‘other’ expenses.
(iii) Rory purchased a new car for use in the business. He took delivery of
this car on 27th March 2016 however the invoice date was 1st April 2016.
The car cost £9,450 including VAT, it has a CO2 emissions factor of 163
g/km and the invoice has been included in ‘other’ expenses together with
the cost of all motor running expenses.
(iv) Legal fees include conveyancing fees of £1,200 (gross) in relation to a
property Rory has purchased as an investment.
(v) Review of goods purchases for resale uncovers that:
- an invoice has been received for goods totaling £1,350 (net) that
have not been delivered and the order was subsequently
cancelled.
- the only evidence supporting the delivery of a cement mixer
costing £1,480 (net) is a delivery docket however you have
verified that the mixer is on site.
QUESTION 3 (Cont’d)
Requirement
Calculate the amount of VAT payable by or refundable to Rory for the quarter
ended 30th June 2016.
Total 20 Marks
Section B
Answer ANY TWO of the Three Questions
QUESTION 4
(i) HMRC has significant powers with respect to both requesting
information in support of a tax return and physical inspection of
premises.
Required:
Briefly outline the limit and scope of HMRC powers to request
information from taxpayers (and others) and inspect premises.
(ii) For tax and NIC purposes, self-employment has some material
differences with employment.
Required:
Briefly outline any three factors which could be considered by HMRC
in determining if an individual was employed or self-employed.
(iii) Generally, employees are taxed on both the money paid to them by
their employer in the form of wages or salary and on other non-cash
benefits, with some exception.
Required:
List any three tax-free benefits which employees may receive by
virtue of their employment.
(iv) It is occasionally necessary for an employee to incur and pay for an
employment/business related expense while performing their duties.
Required:
Briefly outline how such expenditure should be treated for tax
purposes if the employer reimburses the employee for such
expenditure.
(v) The tax treatment of rental income for furnished holiday lettings
(FHL) has some differences with other rental income (i.e. from
residential lettings).
Required:
Briefly outline the criteria used to determine if a FHL exists.
Total 20 Marks
QUESTION 5
Christine works for CALLSIGN LTD, a large software company, and earns an annual
gross salary of £52,500. During the tax year 2016/2017 she received the following
benefits:
- A loan to help her purchase a new home. CALLSIGN LTD advanced her
£50,000 on 6th April 2015 and charged her interest at the rate of 2% per
annum. Christine repaid £16,000 of the loan on 6th August 2016, but the
balance of £34,000 remains outstanding.
- Christine had use of a house owned by CALLSIGN LTD as she tried to find a
home of her own. She first moved into the house on 3rd October 2014 when it
had a market value of £285,000. The company had originally purchased the
house on 16th May 2013 for £197,500. Christine occupied the house until 6th
June 2016 when she moved to her new home. The rateable value of the
house was £3,000. Christine paid £300 rent per month to the company and
had to meet all other household expenses. The house is not job-related
accommodation.
- Use of a 1800 cc diesel Seat car, with a CO2 emission rate of 187 grams per
kilometre and a recommended list price of £15,000. The car was first
provided to Christine on 6th July 2016 for both her private and business use.
The private usage is 40% and the business usage 60%. The company pays
for all the running costs of the vehicle, which amounted to £1,950 for the
period to 5th April 2017. Christine was required to contribute £25 per month
towards the private use of the car and £15 per month towards the cost of
private fuel.
- CALLSIGN LTD provided workplace parking for Christine. This was calculated
as being worth £7.50 per day for each of the 240 days that Christine attended
work during the tax year 2016/2017.
- Use of a home entertainment system. This was first provided to Christine to
use at home on 6th June 2016, the date it was purchased by CALLSIGN LTD at
a cost of £3,500. The system was gifted to Christine outright on 5th April 2017
when it was worth £1,450.
- Occupational pension contributions amounting to £3,000 during 2016/2017.
These were paid by CALLSIGN LTD on Christine’s behalf.
Requirement
(a) Calculate the total value of benefits provided to Christine for the purposes of
income tax, for the tax year 2016/2017.
12 Marks
Question 5 is continued on the next page.
QUESTION 5 (Cont’d)
(b) You ascertain that Christine has made gift aid donations in 2016/17 amounting
to £560 and that she donates 5% of her gross salary to the company pension
scheme. Christine also received dividends of £5,215 and interest of £1,800 in
2016/17. Christine paid tax through PAYE in the amount of £10,822 during
2016/17. Calculate Christine’s income tax liability for 2016/17.
8 Marks
Total 20 Marks
QUESTION 6
Trevor and Simon are software designers working for TORRES LTD.
Cumulative details regarding pay and taxation up to and including month 8 of
2016/2017 may be summarised as follows:
Trevor Simon
£ £
Gross cumulative salary (exclusive
all deductions)
33,617 1,049.52
Tax paid to date 8,331.20 52.40
Tax code K255 -
Company pension scheme
contributions
5% Nil
Childcare Vouchers (per month) 243
Payroll giving (per month) 25
Pay in month 9 4,130 2,015
Trevor had instructed the payroll department of TORRES Ltd to make both childcare
deductions and the charitable (payroll giving) donations throughout 2016/17. These
childcare vouchers have been provided to Trevor (through the payroll) since the
inception of the CCV scheme. Trevor has been a member of the TORRES Ltd
pension scheme for a number of years.
Simon joined the firm during month 8 and TORRES Limited have been under
instruction to tax Simon on a month 1 basis using a basic single person’s tax code.
Simon informed TORRES Ltd that he was not a member of his previous employer’s
occupational pension scheme and instead has continued to make contributions of
£75 per month to a personal pension scheme.
Requirement
(i) Complete all relevant payroll calculations, relating to PAYE and NIC for
Trevor and Simon for months 9.
(14 Marks)
(ii) Explain why an employee might have a ‘k’ code (for PAYE purposes) and
what restrictions (limits) apply with respect to such an individual’s
payroll deductions.
(6 Marks)
Total 20 Marks
Note: Please show all workings clearly. You may perform pro-rata calculations,
where relevant, by reference to months rather than days.
Taxation (Northern Ireland)
Sample Paper 2 – Suggested Solutions
ANSWER 1
Regina’s Income tax computation for the year ended 31
December 2016
£ £
Net profit per accounts 27,069
Less:
Interest 294
Rent 1,837
(2,131)
Add
Drawings 24,125
Painting – Flat (1/6 x 980) 163
Purchase of Fax 530
Interest on unpaid tax 1,165
Loan to customer 315
Interest on premises (1/6 x
3,210)
535
Light and heat (15% x 1,855) 278
Landline (10% x 1,685) 169
Mobile (65% x 538) 350
Parking fines 140
Motor (70% x (2,768 - 140) 1,840
Leasing MV (15% x
£2,108)+(£2,108 x 85% x
70%)
1,570
National Charity donations 291
Donation to political party 145
Legal fees re investment
property
1,229
Depreciation 3,035
35,880
60,818
ANSWER 2
(i) Henry’s tax code would be calculated as per:
Item £
Basic PA 11,000
Assessable benefits (2,300)
Underpaid tax (£750 / 0.4)* (1,875)
Professional subscription 300
Total 7,125
Henry’s tax code is likely to be 712L
*-As Henry is a higher rate taxpayer, reducing his tax code by £1,875
exposes a further £1,875 of his income to his highest marginal rate of
tax (40%). This would have the effect of collecting a further £1,875 x
40% = £750 in income tax thereby collecting the previously under-
collected income tax.
(ii) Since the van clearly emits Co2 and the restricted private use condition
is not met, Frank’s benefit in kind is made up of two flat rate amounts:
£3,170 in respect of the van & £598 in respect of fuel for a total
assessable benefit if £3,768. (Note that the usual rules applying to car &
fuel benefits are much simplified for company vans).
(iii) To be allowable/deductible expenses against employment income, the
four conditions to be met are that expenses must be incurred (i) wholly,
(ii) exclusively & (iii) necessarily (iv) in the performance of the
employee’s duties. In practice this implies that no duality of purpose
for the expense is permitted (for example, the employee may require
spectacles to perform their duties at work but, presumably they’d also
use their spectacles at home therefore there is duality of purpose and
the cost of spectacles would be disallowed). Further, the employee
should be able to demonstrate that they cannot otherwise perform their
duties without incurring the expense. Thus, in the context of the above
points, it is common to allow the cost of professional subscriptions,
protective clothing, tools, travel costs from the employees ‘base’
although this list is not exhaustive.
(iv) Grantham’s assessable profits would be as follows:
YOA Basis Period £
2014/15 1/9/14 – 5/4/15 7/8 x £13,200 11,550
2015/16 1/9/14 – 30/4/15
1/5/15 – 31/8/15
4/12 x £22,740
13,200
7,580
20,780
2016/17 y/e 30/4/16 22,740
Overlap Period 1/9/14 – 31/3/15
1/5/15 – 31/8/15
11,550
7,580
19,130
(v) As a seller of taxable goods, Sean is statutorily obliged to register for
VAT if the value of his turnover exceeds £83,000 in any 12 consecutive
months (or, at any point, if he believes that the value of his turnover will
exceed this limit in the next 30 days). Sean reaches the cumulative
threshold by the end of June 2016 when the cumulative value of his
turnover is £93,728 (7 months). Sean has 30 days (until the end of July)
in which to register for VAT with HMRC.
ANSWER 3
Rory Parks
VAT for quarter ended 30th June 2016
Outputs Gross VAT Net
(£) (£) (£)
Standard-rated sales
(£149,700 x 1.2) 179,640.00 29,940.00 149,700.00
Deemed supply
- Legal Fees 1,200.00 200.00 1,000.00
Fuel scale charge 256.00 42.66 213.34
181,096.00 30,182.66 150,913.34
Purchases
(W1)
88,464.00 14,744.00 73,720.00
Goods – no invoice 1,480.00 1,480.00
Other expenses
(W2)
4,781.00 796.84 3,984.16
Entertainment 485.00 485.00
Postal services 448.00 448.00
Motor Vehicle 9,450.00 9,450.00
Electricity 3,874.00 645.67 3,228.33
Accountancy fees 1,645.00 274.17 1,370.83
Building Insurance 1,280.00 1,280.00
Legal Fees 2,174 362.33 1,811.67
114,081.00 16,823.01 97,257.99
VAT Due 13,359.65
Workings
(£)
(1) Purchases 76,550.00
Less - goods cancelled (1,350.00)
- goods no invoice (1,480.00)
Net purchases 73,720.00
VAT @ 20% 14,744.00
Gross Purchases 88,464.00
(2) Other expenses 15,164.00
Entertainment – blocked (485.00)
Postal Services – exempt (448.00)
Motor Vehicle – blocked (9,450.00)
Gross expenses 4,781.00
Less VAT @ 1/6 (796.84)
Net expenses 3,984.16
For the purposes of the solution, it has been assumed that the VAT fuel scale
charges in force from 1/5/16 were applicable throughout the period covered by this
VAT return.
ANSWER 4
(i) HMRC has the statutory power to request information from taxpayers
and third parties. They must give a written information notice and would
use this power in circumstances where taxpayers have not fully
cooperated with previous requests for information. Either the taxpayer or
a tribunal must give approval for third parties to be contacted. This
information would typically relate to financial records, diaries, notes or
contracts and, generally, requested documentation would give
information which would reasonably be required to check an individual’s
tax position. HMRC cannot ask tax advisors or accountants to give
information connected with their function (e.g working papers).
HMRC can enter the business premises of a taxpayer whose liability is
being checked for the purposes of checking the taxpayer’s tax position.
HMRC may not enter a private dwelling or any part of the business
premises used as a private dwelling.
(ii) Any three from:
Degree of control. Employees are managed or supervised, a self-employed
person decides when, where, how often, how long (and so forth) that they
work.
Provision of equipment. Whether someone provides their own equipment (or
not) can indicate if an individual is under a contract of service (i.e. self-
employed) or a contract for service (i.e. employed).
Hired help. The discretionary power to hire help or sub-contract can indicate
that an individual is self-employed.
Financial risk. Receiving a regular wage or salary obviously indicates
employment whereas the individual bearing the income risk associated with
varying levels of jobs/engagement would indicate self-employment.
Holiday/sick pay. Entitlement to pay under either of these categories would
indicate employment.
Exclusivity. When an individual works for only one person then a contract of
service (i.e. employment) is indicated.
(iii) In reality this could be a very long list but could include any three from
such items as:
Employer pension contributions;
Employer provision of a car parking space at or near the place of work;
Approved mileage allowance;
Annual Christmas (or other) party provided the total cost to the employer does
not exceed £150 per head;
Workplace child care facilities or up to £55 per week for a child-minder (if
workplace childcare is not provided);
Reasonable removal/relocation expenses (if required due to a new job or
relocation within an existing employment) up to £8,000.
(iv) If the employer reimburses the employee then the reimbursed amount
will form part of the employee’s income for tax purposes (even if the
original expenditure was business/employment related). If the expense
is an allowable expense, then the employee can deduct it from their
employment income. An allowable expense would, generally, be incurred
wholly, exclusively and necessarily in the performance of the employee’s
duties. This would include expenditures such as necessary travelling and
subsistence expenditure or subscriptions to a professional body.
(v) In order to qualify as FHL, the letting must be made on a commercial
basis with a view to the realisation of profit. Additionally, the FHL must
satisfy the following criterion:
210 day rule: the property must be available to let to the general public for at
least 210 days per annum.
105 day rule: the property must be actually let for 105 days per annum
(excluding any longer-term lets).
155 day rule: the total periods of longer term occupation (i.e. more than 31
consecutive days) must not exceed 155 days per annum.
ANSWER 5
(a) Christine Benefits 2016/2017
1. Loan (£) (£)
(i) Average Method
£50,000 + £34,000/2 = £42,000
£42,000 x (3.00 – 2.00)% = 420 1,785
(ii) Strict Method
£50,000 x (3.00 – 2.00)% x 4/12 166.67
£34,000 x (3.00 – 2.00)% x 8/12 226.67
393.34
Christine would choose to be taxed on the lower ‘strict’ statutory method
2. Accommodation (£)
Rateable value 3,000
Additional
(£197,500 - £75,000) x 3.00% 3,675.00
6,675.00
Benefit = £6,675.00 x 2/12 1,112.50
Less contributions (300 x 2) (600) 512.50
3. Car (£)
Benefit £(15,000 x 37% x 9/12) 4,162.50
Less Contributions £(25 x 9) (225)
3,937.50
Fuel £(22,200 x 37% x 9/12) 6,160.50
5. Home Entertainment Systems
Use £3,500 x 20% x 10/12 583
Gift
Current Market Value (less price paid) 1,450
Original cost less use (less price paid)
(£3,500 – £583) 2,917
The higher amount is taken 2,917
6. Pension Contributions –
exempt (as is workplace
parking)
Total benefits 2016/2017 14,503.84
(b) Christine Income tax computation 2016/17
£ £ £ £
Gross Salary 52,500 52,500
Pension (5%) (2,625) (2,625)
BIK (from above) 14,503 14,503
Interest
£1,800 1,800 1,800
Dividends
£5,215 5,215 5,215
Personal Allowance (11,000) (11,000)
Taxable Income 53,378 1,800 5,215 60,393
32,000 @ 20% 6,400
Ex B/R 700 @ 20% 140
20,678 @ 40% 8,271.20
53,378
500 @ 0% NIL
1,300 @ 40% 520
1,800
5,000 @ 0% NIL
215 @ 32.5% 69.88
5,215
Tax Liability 15,401.08
Less: Tax Paid at Source
PAYE (10,822)
Outstanding tax liability 4,579.08
ANSWER 6
(i)
PAYE Trevor Simon
Income Tax (£) (£)
Gross salary to
date
33,617.00 N/A
Salary for month 4,130.00 2,015.00
37,747.00 2,015.00
Less superannuation @ 5%
CCV (£243 x 9)
GAYE (£25 x 9)
(1,887.35)
(2,187.00)
(225.00)
NIL
NIL
NIL
33,447.65 2,015.00
Additional/(Free)
pay
2,559 x 9/12 1,919.25
11,000 x 1/12 (916.67)
Net Taxable Pay 35,366.90 1,098.33
Taxed as per
£32,000 x 9/12 x 20% 4,800.00
£11,366.90 x
40%
4,546.76
1,098.33 x 20% 219.67
9,346.76 219.67
Less paid to
date
(8,331.20) N/A
Tax due in
month 9
1,015.56 219.67
NIC
Primary
£(3,584 – 672) x 12% 349.44
£(3,887 – 3,584) x 2% 6.06
£(2,015 – 672) x 12% 161.16
355.50
Secondary
£(3,887 – 676) x 13.8% 443.12
£(2,015 – 676) x 13.8% 184.78
798.62 345.94
(ii) When an individual has under-collected tax from previous years, or other
untaxed income, their weekly/monthly tax free allowance may be
reduced so as to effectively increase weekly/monthly taxable income and
so effect a collection of the resultant tax liability. When any under-
collected tax or taxable benefits exceed the basic personal allowance,
then the tax-free allowance becomes negative – i.e. it becomes
additional (not free) pay. To identify such a case, the tax code is given
the prefix ‘k’ (in contrast with the usual case where the letter is a suffix).
Obviously, for a large ‘k’ code (and/or someone with relatively small
salary/wages), the weekly/monthly deductions could be very large and
this may cause undue hardship for an individual. Subsequently, an upper
limit applies for weekly/monthly deductions and such deductions may
not be greater than an amount equal to 50% of the employee’s gross
pay (less pension contributions) for that pay period. Note that the
liability is still due to HMRC, it is just that it will not be collected through
payroll deductions.
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